As Wounded Lenders Tighten Screws, Investors May Find Relief in DSTs.
If you were a fan of Saturday Night Live in the 70s and 80s, you certainly remember legendary comedienne, Gilda Radnor, and her Roseanne Roseannadanna character’s overuse of the phrase, “If it’s not one thing, it’s another.” Investors using a 1031 exchange today can empathize with that sentiment as they encounter one hurdle after another in trying to complete their exchanges in a COVID-19 plagued economy where challenges just seem to keep popping up.
First, it was the issue of 1031 exchangers finding it difficult, if not impossible, to complete their exchanges within the 45-day property identification and 180-day close deadlines with so much of the economy shut-down. Fortunately, the Treasury Department and Internal Revenue Service intervened and issued guidance in IRS Notice 2020-23 stipulating that investors would receive automatic extensions to July 15th. That helped.
Now, however, many of those same investors selling an investment property and intent on purchasing another like-kind property with a 1031 exchange are facing a new challenge: securing a loan to satisfy the requirement for replacing debt.
It is no secret that lenders have been wounded in this recession. With tenants struggling to pay rent and with many states and local governments issuing rent moratoriums, lenders bear the massive financial weight of underperforming loans and the very real concerns of large defaults.
Little wonder then that a lender’s attention is more focused on shoring up their existing book, rather than issuing new debt. And while new loans are still being offered, approval standards are undoubtedly tighter than before, and the approval process is taking longer. Neither is a good condition for 1031 exchangers who need to secure replacement debt and close on time.
The Delaware Statutory Trust (DST) structure is a potential solution for these suitable investors. The structure of a DST investment is very different from a traditional 1031 exchange where one property type is exchanged for a like-kind property. With a DST, the property or properties have already been evaluated, gone through a due diligence process, valued, inspected, and purchased. A property management team has already been hired and debt on the property—non-recourse to the fractional interest owners in the DST—has already been secured.
This means a 1031 exchanger who doesn’t think he can secure funding in time to complete a successful exchange, can use a DST as an approved like-kind exchange, invest in an institutional-quality property or properties where debt has already been secured (thus satisfying his debt replacement requirement) and most importantly, can often close within just a few days.
Our team at Fortitude Investment Group has been able to help many 1031 exchange investors find ways to complete their exchanges when challenges seemed insurmountable. Please do not hesitate to contact us if we can answer any questions you have or assist with your exchange.